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Reliance, ONGC Surge After India Raises Gas Price: Mumbai Mover

Reliance Industries Ltd. and Oil & Natural Gas Corp., India’s biggest energy explorers, led Indian stocks higher after the nation’s cabinet agreed to increase the price of natural gas.

Reliance rose as much as 5.2 percent to 873 rupees, headed for its steepest gain since Feb. 20, and traded 2.6 percent higher at 851.50 rupees as of 12:03 p.m. in Mumbai. ONGC surged as much as 10 percent and Oil India Ltd. 9.2 percent. The benchmark S&P BSE Sensex climbed 1.9 percent.

The cabinet approved a pricing formula recommended in December by a panel led by Chakravarthy Rangarajan, chief of the prime minister’s Economic Advisory Council, Oil Minister Veerappa Moily told reporters in New Delhi today. The new rates will be effective from April 1, 2014, as a weighted average of traded gas prices in the U.S. and U.K. and imports by Japan and India in 2013, Oil Secretary Vivek Rae said. The price may be as high as $8 per million British thermal units next year from $4.2 per million Btu at present, he said.

“Apart from improving our profitability, this will also encourage more investments in India’s oil and gas sector,” T.K. Ananth Kumar, finance director at Oil India, said in a phone interview. “It will encourage companies to become much more aggressive in exploring for new gas.”

The higher price will increase Reliance’s earnings per share by 5.3 rupees at the current rate of output, Niraj Mansingka and Kiran Tulasi, Mumbai-based analysts at Edelweiss Securities Ltd., said in a report today. Each dollar increase in gas rates will raise Oil India’s annual net income by about 2.5 billion rupees ($41.8 million), Kumar said.

Output Falls

Reliance, controlled by India’s richest man Mukesh Ambani, and partner BP Plc have been seeking higher prices of natural gas even as production from their field in India, the nation’s biggest, has slumped in the past three years. The drop in output and aging fields operated by ONGC have forced the country to import expensive gas, which has contributed to a widening current account deficit and a drop in the rupee to a record low.

“Higher gas prices will encourage more investments in exploration and make smaller pools of gas economically viable to produce,” said Neelabh Sharma, a Mumbai-based analyst at BOB Capital Markets Ltd. “Higher gas price will also increase cost of power generation and fertilizer production and the government will have to take care of that.”

Every $1 increase in the price of gas will make an additional 10 trillion cubic feet of natural gas economically viable to produce, Sharma said. India had 47 trillion cubic feet of proven gas reserves at the end of 2012, according to BP data.

Selling Price

Reliance has been selling gas from the KG-D6 block off India’s east coast at $4.2 per million Btu since it started production in April 2009. The government more than doubled ONGC and Oil India’s selling price to $4.2 per million Btu in May 2010.

Output from the KG-D6 block slid more than 75 percent since 2010 as the reserves proved geologically difficult to recover. Prime Minister Manmohan Singh is seeking to boost energy exploration and production and cut an import bill that widened the current account deficit to a record in the three months ended Dec. 31. The deficit narrowed to $18.1 billion in January through March, compared with $31.9 billion in the preceding three months, the Reserve Bank of India said yesterday.

India’s gas imports increased to 30 percent of total consumption in the year ended March 31 from 20 percent two years ago, Finance Minister Palaniappan Chidambaram said in New Delhi today. Overseas purchases may rise to 234 million cubic meters a day in 2017 from 50 million last year if local output is not increased, he said.

“We believe these new prices will increase investment and then production,” Chidambaram said.

The rupee slumped to a record 60.7650 per dollar on June 26. The currency has dropped 6.1 percent this month, the worst performance among 24 emerging-market currencies tracked by Bloomberg.

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